What we’re reading on the impact of financial regulation on growth

“As an objective matter, the banking system is significantly more resilient today as a result of these reforms. At the end of 2015, large banking organizations had twice as much tier 1 capital and liquid assets in proportion to their size as they had entering the crisis, and the loss-absorbing quality of their capital has greatly improved. The quality and level of capital at smaller banks is stronger today as well.” Read the speech.

“[W]e wanted to understand how the implementation of financial services regulation is impacting how companies operate and serve their customers. What we heard was a particularly strong and growing concern for the ability of businesses to access credit and to manage cash flow and liquidity due to existing and pending regulations. … As a result, in an era where economic growth has been stagnant, we find that existing and additional regulation of the financial services industry must strikes a better balance between its impact on business and economic growth.” Read the report.

“Resilience and threats to financial stability are systemwide concepts. To measure and monitor them, we must look across the financial system, for example, at nonbanks as well as banks. We must examine both institutions and markets to appreciate how threats propagate and to evaluate ways to mitigate and manage them. The financial crisis exposed critical gaps in our analysis and understanding. Gaps in analysis, data, and policy tools contributed to the crisis and hampered efforts to contain it. Filling them is crucial to assessing and monitoring threats, and to developing what we call the macroprudential toolkit to make the financial system resilient.” Read the speech.

“When asked about the potential impact of a UK exit, respondents were unconcerned, with one noting that ‘the remainder of the Euro-zone is unlikely to curb its trade with the UK as a result…they already have separate currencies anyway.’ When asked about the impact of concern or uncertainty over the direction of financial regulatory policy on 2016 economic growth, respondents were a bit more optimistic than in the previous survey: 28 percent of respondents (14 percent at end-year) expected no impact; 50 percent (65 percent at midyear) expected a negative impact of up to 50 bps, and 22 percent (21 percent at end year) expected a negative impact of more than 50 bps.” Read the analysis.

What we’re reading on systemic risk

“New financial products, delivery mechanisms, and business practices, such as marketplace lending and distributed ledger systems, offer opportunities to lower transaction costs and improve the efficiency of financial intermediation. However, innovations may also embed risks, such as credit risk associated with the use of new and untested underwriting models. In other instances, risks embedded in new products and practices may be difficult to foresee.” Read the report.

“The FSB has identified the following four important structural vulnerabilities associated with asset management activities that pose potential financial stability risks and which the FSB considers should be addressed through policy responses… Among these, issues associated with (i) liquidity mismatch and (ii) leverage are considered key vulnerabilities on which to focus.” Read the consultative document.

“SRISK is set up to model returns to equity holders; therefore the stress impact is bounded by the amount of equity. This is particularly worrying for banks that are initially insufficiently capitalised, where the limit on losses is most likely binding in a stress scenario. We show that this has important practical implications, namely SRISK stress impact is only a tiny fraction of the size of the ECB/EBA stress impact for the least well capitalised banks. Therefore we conclude that SRISK is unsuitable as benchmark for macro-prudential stress tests.” Read the working paper.

What we’re reading on insurance regulation

“MetLife has 90 million customers, including approximately 50 million U.S. customers,” who could face losses in the event of MetLife’s financial distress… Beyond the risks borne by individual retail policyholders, the Council found that MetLife’s financial distress could also destabilize the statebased guaranty associations designed to ensure the payment of insurance policies in the event of an insurer’s failure.” Read the brief.

What we’re reading on fintech

“However, simply expanding the financial sector may not be the best way to reach those that are still currently unbanked, and there are limits to the ways in which fintech alone can address financial inclusion. The digital divide—less than 50 percent of households in the bottom income quintile have adopted the Internet at home—limits the extent to which online payment and lending solutions will help address the needs of unbanked households in the lowest income quintile.” Read the issue brief.

“Already, FinTech is spurring new entrants including payments providers, peer-to-peer lenders, robo advisors, innovative trading platforms, and foreign exchange agents. This could, with time, unbundle traditional banking models and deny banks their traditional economies of scale and scope. The systemic consequences of FinTech are even more complex. More diverse business models and alternative providers are positives for financial stability. By allowing better credit screening and less adverse selection, FinTech could improve risk assessment, credit allocation, and capital efficiency. But if it encourages herding on common information, trading positions could become more correlated. And if switching costs in funding markets fall, liquidity risk could rise and systemic risks grow.” Read the speech.

The views expressed in these articles do not necessarily represent the views of the initiative, its co-chairs, task force members or BPC.